Development of Recorded-Music Industry - Essay Example

?Executive summary The music industry comprises of four broad segments song writing and publishing, recording, live music and artist management (BPI2012). The recorded music sector has been the dominant segment in terms of revenues since the introduction of music records, a situation that was enhanced further by consolidation which led to the emergence of four major conglomerates. However, in the 21st century, the emergence and growth of digitalisation, data compression and the Internet have led to a major disruption in the recorded-music industry’s value chain and business models. The growth of digital music has seen the recording industry’s revenue streams continue to sink to date largely because of the ease of compression and distribution of digital music illegally over the Internet. This paper describes the rise of the recorded-music industry, the emergence of disruptive technologies and the effect of this disruption on the marketing strategies of today’s recording industry companies. The marketing strategies are discussed in perspective of the 7Ps of marketing. 3Ps are identified and analysed as potential channels for implementing marketing strategies that could mitigate the threat to recording industry’s digital music sales posed by free and illegal peer-to-peer (P2P) file-sharing websites. Table of Contents Executive summary 1 Table of Contents 2 2.0.Marketing strategies in the Music Industry 6 2.1.Product 7 2.2.Price 8 2.3.Place 8 2.4.Promotion 8 2.5.People 9 2.6.Process 10 2.7.Physical evidence 10 2.8.Section summary 10 3.0.Topics impacting the industry 11 3.1.Changing process using partners and intermediaries 11 3.2.Promoting legitimate digital music using merchandise and concert business 13 3.3.Repackaging physical evidence 14 4.0.Conclusion 15 References 16 1.0. Introduction According to the British Recorded Music Industry, the music industry can be broadly categorised into four sectors: song writing and publishing, recording, live music and artist management (BPI 2012). In all these sectors there are many different organisations and individuals performing different roles and earning their living. Currently the large share of the industry’s value is generated and controlled by the recorded music and live music sectors. The recorded sector is dominated by four major corporate labels that comprise of several smaller companies that focus on different regions and markets. These four conglomerates are: Sony Music Entertainment, Universal Music Group, EMI Music and Warner Music Group (The Economist 2008). The live music sector is dominated by Live Nation Entertainment in the United States. The growth of the recorded music sector epitomised by the rise of music labels towards the end of the 20th century led to the recording sector being synonymized as the music industry (Wikipedia 2012). The recorded music sector grew largely due to the ability of the music labels to efficiently and cost-effectively fulfil the several stages in the process of moving music from artist to consumer. The major record labels are vertically integrated businesses. The stages in the recording industry are: Artists and Repertoire (A&R) – involves finding new acts; recording music – involves composition, production and licensing of copyright; manufacture of mechanical recordings e.g. CDs and vinyl; music distribution and logistics; marketing and promotion; and retail activities (Fleming & E. G. Hughes 2002). Some of the factors that made music labels profitable are: economies of scale which spreads overheads over a wider revenue base; diversity of artists which enables them to maintain a steady flow of releases; and breadth of music catalogue. However, in the 21st century, the emergence and growth of three technologies led to the disruption experienced in the broad music industry in general, but mostly in the recorded-music industry’s value chain. These three technologies are digitalization, data compression and the Internet (Dolata 2011). Digitalization of music made it easy to make copies repeatedly with minimal loss of quality. Data compression standards, on the other hand, enabled exchanging and downloading of data-intensive digital products to be less technical, unproblematic and relatively easy for anyone to execute (Dolata 2011). Finally, the Internet provided the ideal medium for the global exchange of these digital, compressed music products. The interplay between these three technological developments significantly changed the consumer preferences regarding usage of music, especially amongst teenage music consumers. It also led to the enormous increase in the non-commercial exchange of music via the Internet possible (Peitz & Waelbroek 2006). Today, consumer media preferences have become clearly differentiated: DVD movies, cell phone use and computer gaming compete directly with paid music consumption (Dolata 2011). This has had a devastating effect on the bottom lines of major music labels. Traditionally music labels got their revenue from three streams: record sales, live performances or broadcasts and synchronisation – which is the use of copyrighted music to accompany visual images in TV programmes, advertising, movies and so on (Fleming & E. G. Hughes 2002). However, with the ubiquity of the three technologies identified above, the core revenue stream for the recording industry, which is record sales, drastically reduced. From the late 1990s to date the recording industry sales have continued to sink: decreasing worldwide from $40.5 billion in 1999 to $31.8 billion in 2006 and to $27.8 billion in 2007 (IFPI 2007). The sad fact for record industry is that the average American spent thrice as much on recorded music ten years ago as they do today (DeGusta 2011). Digitalisation, data compression and the Internet have brought about serious shifts in the production, distribution and market structures of recorded music. Music production today is no longer tied to recording studios because it can now be produced independently and in a decentralized manner by the artists themselves. Music sales no longer occur only through a global distribution system controlled by the major music labels, it now takes place digitally via online stores. Does this therefore portend the imminent death of the recording industry? No, it does not. This simply means that industry players have to re-strategize and come up with new business models if they are to remain relevant and competitive. One strategy that is currently being pursued by music labels is diversification. According to Sutter (2005) record companies have turned into music marketing companies by adding merchandising and concert business to the scope of their activities. The merchandise and concert markets are more attractive in comparison to the record market because of two reasons. On the one hand, unauthorized copies of merchandise do not appear to cause as big of a problem as unauthorized copies of sound recordings do. On the other hand, concerts cannot be copied (Sutter 2005). In light of the above changes to the music industry this paper discusses the emerging marketing issues that will affect the success or otherwise of the recorded music industry as we move into the middle of this decade. This discussion shall be guided by a critical evaluation of the 7Ps of marketing: product, price, place, promotion, process, people and physical evidence. The objective is to identify which of the Ps are currently underutilised or underexploited by the recorded music industry as it tackles the challenges brought about by the growth of digital music. Ultimately, the paper shall discuss how music labels could enhance their business models using marketing strategies in these identified weaker Ps. 2.0. Marketing strategies in the Music Industry According to the Chartered Institute of Marketing (2009) the customer has to be placed at the heart of marketing because the purpose of marketing is to make companies get close to customers in order to satisfy their needs. The American Marketing Association elaborates further by defining marketing as “the activity, set of institutions, and processes for creating, communicating, delivering, and exchanging offerings that have value for customers, clients, partners, and society at large (American Marketing Association 2007).” The Internet, digitalisation and data compression have drastically altered the production, distribution, and consumption of music. Digitalisation of music distribution is expected to continue to dominate the direction of the music industry as we move towards the middle of this decade. However, even though the industry experienced an overall 8 per cent increase in digital revenues in 2011 to US$ 5.2 billion, record companies are still struggling to build successful digital music businesses in this very dynamic environment in which they operate (IFPI 2012). This paper shall largely discuss the marketing strategies employed by record companies as they endeavour to increase their presence, performance and profitability in the digital music landscape. Kotler and Keller (2008) identified the three modern marketing management orientations that an organisation could have as production, sales, or marketing. Product orientation refers to where management makes decisions without considering consumer needs. Product orientation is largely practised by the manufacturing industry. Sales orientation refers to where management focuses on using large-scale promotional efforts to drive their organisation’s success. Sales orientation is largely to be found in mass market product industries. Marketing orientation refers to where the organisation places consumers’ needs at the heart of their strategy. Market orientation is largely practised by the service industry. The traditional recorded-music industry followed product orientation as a manufacturer of CDs, vinyl, cassettes and distributor of music. With the changes brought about by digitisation, data compression and the Internet, the recording industry has to shift from the product orientation paradigm to the market orientation paradigm mainly practised by service industries. This section reviews how the record industry is currently performing with regards to the marketing orientation paradigm using the 7Ps of marketing: product, price, place, promotion, people, process and physical evidence. 2.1. Product Product refers to the core benefit plus the supplementary services related to acquisition, delivery, and consumption (Lovelock & Wright 2002). Before digitisation of music, record industries controlled the music selection available to customers through their catalogues and oligopoly of distribution channels. With digitisation of music, record companies have been forced by competition from the illegal free Peer-to-Peer (P2P) websites to broaden their selection and to offer ability to customize CDs and music compilations. However, unlike their free P2P competitors, the recorded music industry has to contend with the issue of obtaining licences from every copyright holder to legitimise all downloads. 2.2. Price Price is the only element in the marketing mix that generates revenue (The Chartered Institute of Marketing 2009). It refers to both financial cost and nonfinancial costs such as traveling to a store, waiting time, sensory experiences and so on (Vaccaro & Cohn 2004). Digitisation of music has lowered the cost of making copies of a song or album, distribution and logistics, and storage and inventory costs. Digital goods are perpetual thus the cost of producing one album is almost equal to the cost of producing several copies of that album now and in future for sale (Turbman et al. 2006). Here as well, illegal free P2P competitors are exerting immense pressure on legitimate online businesses to further lower their costs. The advantage that music labels have is that it they can guarantee customers quality unlike in free P2P sites where the quality of the music uploaded is not guaranteed. 2.3. Place Place refers to where customers will come to buy the product, at a physical locations, on the Internet, or both. The Internet has given music labels a convenient place to offer customers their products 24 hours a day, all year round. Music labels also still continue to offer offline channels to cater for customers who want multichannel alternatives. There are over 400 licenced digital music services worldwide (IFPI 2011). Place therefore should not be a challenge for the recorded-music industry going digital. 2.4. Promotion Promotion is the way a company communicates what it does and what it can offer its customers (The Chartered Institute of Marketing 2009). It includes activities such as advertising, branding, PR, special offers and so on. The traditional approach used by music labels was more transactional rather than developing long-term customer relationships. The major record companies used their immense resources to push their product through heavy advertising and publicity. According to Christman (2004) use of traditional media such as network television still has a huge impact on the music sales of featured artists especially after coverage of events such as the Grammy Awards. With the Internet, communication between marketer and consumers could take place in one of three ways: business-to-consumer promotions, consumer-to-business information requests, and consumer-to-consumer communication (Vaccaro & Cohn 2004). This implies that in additional to the traditional mode of promotion, music labels must now take advantage of the platform provided by the Internet to develop convergent strategies such as personalised marketing communications, customer relationship management using their online databases as well as services marketing. 2.5. People People refers to any individuals from the organisation who come in contact with customers (The Chartered Institute of Marketing 2009). Traditional music stores treated customers as mass market and tended to ignore the needs of the older generation (Lang & J. Hughes 2003). In the digital music industry, people factor is more restricted in comparison with physical store because of limited interaction between employees and customers other than through online channels or on-phone customer service operations. 2.6. Process Process refers to those steps in the service creation and delivery experience that are done by the customer or service provider and that could be considered as an extension of the product or service (Vaccaro & Cohn 2004). They involve issues such as information given to customers, waiting times and staff helpfulness. The process of acquiring music from legitimate online stores consumes less effort and time than the same process at a physical store. These online stores also allow customers to customise their own music compilations as well as the capability to download the music on multiple devices such as computers, portable MP3 players, smartphones and tablets. Technology also allows for synchronisation across these multiple devices. 2.7. Physical evidence According to Vaccaro and Cohn (2004) physical evidence refers to the tangible and visible aspects of the organization associated with image and perceived quality of the product or service. For the physical evidence shown by a company to be effective, it has to confirm the assumptions of the customer (The Chartered Institute of Marketing 2009). In traditional in-store experience physical evidence was easy to demonstrate through use of store design, signage, and ambience, CD and CD container and cover art. In digital music there is need for market research to find out what type of physical evidence needs to be provided with the core music product to enhance customer value and increase sales. 2.8. Section summary From this section the major issues that emerge are two. Firstly, Illegal free P2P websites have an edge over music labels in the product selection of legitimate online music because the latter need to negotiate licenses from all copyright holders. This makes it attractive for customers of digital music to switch to the illegal P2P websites that offer greater music variety. Secondly, promotion, process and physical evidence offers the best channel for the recorded-music industry to beat the illegal free Peer-to-Peer (P2P) music download websites. In promotion, the music labels need to enhance their performance in all the three modes of online communication identified by Vaccaro and Cohn (2004). Under process, the recording industry should use their vast resources to transfer their dominance in the traditional music value chain to the digital music value chain. Finally, music labels should also use their branding prowess in the traditional music industry to create physical evidence that shall better their market positioning to the customer over the illegal P2P websites. 3.0. Topics impacting the industry 3.1. Changing process using partners and intermediaries Process refers to those steps in the service creation and delivery experience that are done by the customer or service provider and that could be considered as an extension of the product or service (Vaccaro & Cohn 2004). Today, digital music is segmented into two broad consumption models: ownership and access. The former is characterised by download offerings epitomised by online stores such as Amazon and iTunes whereas the latter is characterised by subscription services from companies such as Spotify, Rdio and MOG (Knopper 2011). According to the IFPI (2012) both models of consumption have enormous potential for growth especially with increasing broadband penetration across the globe and a rising demand for smartphones and tablets. The one thing that stands out from this paragraph is the numerous players that have an influencing stake in digital music, namely: Internet Service Providers (ISPs) and mobile carriers – needed for broadband penetration, online retailers and music service providers such as Spotify and iTunes, and electronic device manufacturers such as Samsung, Nokia and Apple. Record companies have to work with the business partners mentioned above if they are to create products that can offer a better user experience than illegal P2P services. Illegal P2P file-sharing over the Internet has grown exponentially since the late 1990s with the collective harm inflicted by these individual infringers threatening the recorded-music business (Reed & Gur 2010). So far the recorded-music industry’s pursuit of legislation and the courtroom has not yielded the effect that industry players had anticipated. However, Reed and Gur (2010) argued that the high costs for legislation enforcement, difficulty in gathering of evidence and low risk of prosecution have not deterred the growth of illegal P2P file-sharing. Neither has the inclusion of other intermediaries such as advertisers, search engines and credit card companies in the widening circle of copyright enforcement reduced illegal downloading of digital music. The failure of legal action to curb the growth of illegal P2P music downloading should spur the recorded-music industry to develop alternative strategies. One such strategy is to re-engineer digital music service creation and delivery experience to customers through entering into strategic alliances with intermediaries. Record companies could partner with ISPs or telecoms companies to enrich the value proposition they offer their customers. Such a partnership has the potential to create a more integrated and seamless service, where one considers the commercial footprint of the music label and the digital reach of the ISP or telecoms company. Record companies could also partner with P2P technology companies to offer legitimate music content for file-sharing. The idea here is that the opportunity to listen to different music before buying will potentially lead to more sales and could potentially benefit the production and sale of a broader range of music (Wunsch-Vincent & Vickery 2005). 3.2. Promoting legitimate digital music using merchandise and concert business There are three major operational processes involved in e-marketing: customer acquisition, customer conversion and customer retention (Chaffey 2009). Customer acquisition refers to attracting visitors to the website through promotions. Some of the techniques used in customer acquisition include: search engine optimisation (SEO), online advertisements and public relations, email marketing and offline campaigns. Customer conversion refers to engaging site visitors in order to achieve sales using techniques such as content management, site usability and accessibility, merchandising and customer service (Chaffey 2009). Customer retention refers to encouraging repeat usage of digital channels for repeat sales. It includes activities such as email marketing, customer management, loyalty programs and personalisation (Chaffey 2008). Promotion is evident in all three e-marketing processes. Digital music requires that recorded-music companies take into consideration the “six Is” of e-marketing developed by McDonald and Wilson (1999) in their promotions or marketing communications. These “six Is” are: interactivity, intelligence, individualisation, integration, industry integration and independence of location. Keeping these elements in perspective by itself does not guarantee success to music labels selling music online. The greater challenge is posed by the strong communities that have developed around the illegal P2P file-sharing sites. Music labels need to find a way to command similarly strong communities not only to compete against the illegal sites but also to increase their customer retention. One marketing strategy that recorded-music businesses are currently pursuing in order to sustain their profits is to add production and sale of merchandise and promoting live concerts. As discussed in the introduction merchandise and concert markets are attractive because on the one hand, unauthorized copies of merchandise do not appear to cause as big of a problem as unauthorized copies of sound recordings do and on the other hand, concerts cannot be copied (Sutter 2005). Following this strategy would enable record labels to focus on making money because of the music and not from it because they would be in a position to offer their music at no cost just like the illegal P2P file-sharing website. The thinking here is that the less costly the music the more people are likely to download it especially if they are guaranteed quality and legitimate music. The more people download the more popular the song and artist become. Ultimately, this leads to increased demand for merchandise and concerts, the two money making and inimitable products for the music label. 3.3. Repackaging physical evidence According to Vaccaro and Cohn (2004) physical evidence refers to the tangible and visible aspects of the organization associated with image and perceived quality of the product or service. The Chartered Institute of Marketing (2009) states that for the physical evidence shown by a company to be effective, it has to confirm the assumptions of the customer. A customer who makes an online purchase from an online music retailer expects greater value than one who obtains the same music for free from an illegal P2P file-sharing website. Other than in guaranteeing quality and legality record companies could work with intermediaries and partners to improve the customer value proposition as well as the physical evidence. The first marketing strategy that record labels could adopt is to enter into partnerships in order to bundle its products. Bundling refers to the practice of selling two or more distinct goods together for a single price (Varian 2003). This is particularly attractive for information goods since the marginal cost of adding an extra good to a bundle is negligible. Bundling increases the value proposition which increases buyer switching costs. It also increases barriers to entry into the affected industries. For example, a music label bundling its digital music with an ISP or mobile carrier, on the one hand allows the ISP/mobile carrier to reduce its churn rate while on the other hand it enables the music label assure its customers of integrated and seamless service. Such partnerships could also be forged with consumer electronics device manufacturers such as Apple and Amazon in order to build customer switching costs further. 4.0. Conclusion Given that the illegal P2P digital music file-sharing websites are largely driven by customer communities, record labels are going to face a difficult challenge in totally eliminating them. From the discussion in this paper it has been seen that following the adage “if you cannot beat them join them” is more appropriate in this scenario than pursuing legal action. Ultimately, customers appear to want a broad selection of free to download music. 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